Volume has been strong with 14,903 lots traded as of 06.05 am London time.

The downward pressure across the complex essentially reflects a negative spillover effect from the equity rout.

After a surge in risk aversion on Monday, with the CBOE Volatility Index (up by 118% in a single day) notching its biggest one-day jump, equities in Asia are experiencing acute weakness today - the Shanghai Composite Index, weaker by approximately 3%, is down the most since June 2016 and the Nikkei 225, down by around 5%, is falling at its quickest pace since November 2016.

That said, the base metals seem to be more resilient than other risk asset classes, principally due to their lower sensitivity (versus equities) to the rise in yields.

On the Shanghai Futures Exchange today, the base metals complex is also experiencing downward pressure (albeit softer), showing an average loss of 0.4%. Similar to LME base metals, nickel (-1%) is the worst performer. In contrast, tin (+0.5%) is the strongest, being the only base metal in positive territory. Copper prices in Changjiang are down by 0.2% at 52,480-52,740 yuan ($8,338-8,379) per tonne and the LME/Shanghai copper arb ratio stands at 7.47, down from 7.49 on Monday.

Turning to precious metals, the complex enjoys only marginal upward pressure, posting an average gain of 0.4%. This comes after a mixed performance on Monday when silver rose by 1.1% and palladium sold by off 2.5%. While the lack of buying pressure in favor of precious metals was driven by an intensifying rise in US real rates until late-December, this is now the result of a stronger dollar, with the currency up for a second straight day. The dollar is bid on expectations of a faster tightening from the US Federal Reserve following the recent signs of stronger inflation dynamics - e.g. US average hourly gains for January (+2.9% year on year) rose the most since June 2009.

On the macro front, the economic calendar is fairly light, with the January retail purchasing managers’ index (PMI) in Europe as well as the December trade balance and the February IBD/TIPP economic optimism from the United States. But given the magnitude of the sell-off in equities and its resulting tightening effect on financial conditions, investors may scrutinize any statement from central banks aiming at calming market turbulence.

Base metals may continue to witness further profit-taking, precisely because of deteriorating macro forces (stronger dollar, weaker risk sentiment). But unless the current sell-off in equities is prolonged and thus has an impact on the real economy, the downward pressure across the base metals should prove contained, especially considering that micro dynamics for most base metals show signs of improving.

Precious metals may enjoy some strength in the immediate term because the macro backdrop could become increasingly friendly for the complex. While the dollar is set to appreciate only modestly, US real rates could weaken more substantially, resulting in some speculative buying. Palladium remains the most vulnerable among its complex, due to its high correlation with risk assets.

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